The main sticking point is Japan. The fragility of Japan's economy makes continuing high oil prices a potential disaster.
The crisis over Jerusalem during the past few weeks may have been overblown on the international oil markets, but it highlights the importance of the Middle Eastern oil trade for Asia. In 1997, 74% of oil imports to the Asia-Pacific region came from the Middle East, a situation that is unlikely to change in the near future. Middle Eastern oil is one of Asia's most critical long-term imports.
But the relationship is not a one-way street. In 1998, Middle Eastern oil exports to Asia dipped to 70% of the total as the financial crisis bit hard into Asia's already contracting economies. The glut of oil in Asia and resulting overproduction in the Middle East destroyed the international oil price and sent Middle Eastern economies into a recession they are only now emerging from.
The interdependence of these two regions is clear. The Middle East exports an average 58% of its oil to Asia every year. Both are concerned with their mutual stability.
All major Middle Eastern oil producers are members of the Organisation of Petroleum Exporting Countries (Opec), and all Opec members are publicly committed to price stability within the US$25-$28 dollar range. Middle Eastern states, through Opec, have consistently intervened with production increases ever since the disastrous move to cut production in late 1998, when oil was at US$10 a barrel.
Opec and its oil-producing partners may not have been able to move the price of oil away from the US$30-$35 range, but their actions show a determination to keep the global economy moving, as well as a newly resurgent Asia. This is regardless of old regional hostilities and temperamental attitude of oil traders.
"Gulf oil producers want to send a message to the world that there will be no problem with the security of oil supplies," Ali Al Naimi, the Saudi Arabian oil minister, said on his arrival in the Gulf emirate of Abu Dhabi for an oil conference on October 15. Al Naimi reiterated that Opec wanted to see an average price of between US$25 and US$28 a barrel and may intervene again before its scheduled meeting on November 12 if oil prices continue to rise.
As Opec's Middle East oil majors Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Iraq and Iran await the outcome of the summit, Asia's economic planners and analysts are counting the cost of the crisis. Few regard the current upset as a major drawback for Asia's economic recovery.
The main sticking point is Japan. The fragility of the world's second-biggest economy makes continuing high oil prices a potential disaster. Japan imports 100% of its oil, and most of this comes from the countries of the Persian Gulf and Arabian Peninsular. This compares with China's import of only 22% to cover its oil needs, and 61.4% for the rest of the Asia-Pacific rim.
Latest available figures show that Japanese imports from the Middle East have had a choppy ride over the past few years. Much of the variance has to do with fluctuating international oil prices - 90% of Japan's Middle Eastern imports come as mineral fuels, predominantly crude oil. Japan is vulnerable to oil price movements.
According to Japan's Ministry of Finance, imports from Middle Eastern countries (excluding Egypt, Libya, and Cyprus, but including Turkey and Israel) reached the US$35.52 billion mark in 1996. The 10% increase in oil prices over the year was the biggest contributing factor to import value growth. Oil imports on their own grew by 14.6% to US$26.41 billion, or 74.4% of total imports.
Japan imported goods from the Middle East worth US$38.52 billion the following year, an 8.5% increase on 1996 which included a 5.8% increase in the volume of oil imports. But by the end of the year, Japanese economic contraction and the slump in oil prices in October had taken their toll. Oil-import growth slowed to well below the 14.6% shown in 1996.
As the Asian crisis really took hold in 1998, Japan's imports of Middle Eastern products collapsed by 33.7% to US$25.44 billion. This was caused by a sharp fall in fuel imports and the continued contraction of the Japanese economy, in itself contributing to the continued oil price slump.
Nevertheless, as Japan stabilises, the signs are that it can weather the current storm. Sustained high oil prices may have an upward effect on Middle Eastern oil-import growth - but they might not cost the Japanese economy more than it already does.
Analysts say that the strong yen, a large oil reserve (314.5 million barrels), cost-cutting as a result of deregulation, excess refining capacity and a shortage of capacity in the rest of the region have combined to give Japan an oil surplus. The economy may be sluggish, but retail oil product prices have not risen at the same pace as crude oil prices. Japan, it seems, is not about to collapse because of the price of Middle East crudes.
Officials, including Finance Minister Kiichi Miyazawa, have said that rising oil prices have not yet hurt Japan's economy. The Government has even asked refineries to export heating oil products to the US market to stabilise the international price.
China is in an even better position. It imports 22% of its oil requirement. According to the Chinese Customs Statistical Review, 61% of China's imported oil was from the Middle East in 1998, and 47.5% from the Middle East in 1999. Oman and Yemen are major sources because of their low sulphur content.
Experts believe this trade can only grow. China's economic growth is not being matched by domestic production, despite large-scale exploration and production efforts in China's 424 potentially oil-bearing basins. By the year 2010, China will be importing upwards of 100 million tonnes of oil a year. The bulk of this will come from the Middle East, given that the area remains China's global strategic supply.
While this makes China vulnerable to current and future price shocks, analysts say the Chinese economy will only be marginally weakened by sustained price rises. Merrill Lynch estimated in its September 18 forecast that, with the price of oil per barrel at US$33, the accumulative direct and indirect impact on China should be no more than 0.5% of the gross domestic product (GDP).
Merrill Lynch maintains its bullish macro economic outlook for China with a GDP forecast of 8% for 2000 and 7.5% for 2001. Other analysts predict that even if an extra US$10 per barrel of oil or oil products were in the offing - costing China around US$7 billion - the impact would only reduce GDP by 1%. China's GDP rose 7.8% in 1999 to 8.04 trillion renminbi (US$971 billion).
One beneficiary of the rise in international prices is China's own domestic petroleum industry. China's crude and refined oil prices were linked to international prices in 1998 and May 2000 respectively. As the international price of oil has risen, so has China's. As if to make the point, in the first seven months of this year, China Petroleum and Natural Gas Group earned profits of 29.1 billion renminbi, a 440% increase on the same period in 1999.
The biggest danger to China comes from a slowdown in regional economies. Regional stock markets are falling - affecting the sale of insolvent firms and new listings. In China, however, US$20 billion is expected to be raised in share placements by the year-end - including the sale of China Unicom, a placement by China Mobile, and listings of Sinopec and PetroChina.
China's August exports and imports rose 27.2% and a staggering 54.7% year-on-year, respectively, compared with 24% and 40% in July. This is of particular importance when it comes to the price of oil. The Middle East's oil economies are pulling out of recession fast and much of the new money made from high oil prices is being put back into precisely those areas where Asia stands to gain - construction, heavy industry and consummer goods.
In 1990, China exported US$1.5 billion worth of goods to Middle East countries. By 1998, Chinese exports to the Gulf Co-operation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) were estimated at US$2.63 billion.
The same is true of Japan. According to the Dubai-based Edwards Economic Research, in 1998, when Japanese crude imports were collapsing, its automobile exports were hitting record levels into the Middle East. The United Arab Emirates, for example, received more than 70,000 cars worth US$722 million. The UAE was Japan's biggest trade partner that year, with US$11.2 billion worth of trade, followed by Saudi Arabia at US$11.1 billion.
Overall, Japanese exports to the Middle East in 1998 rose 18.5% against the previous year to US$12.39 billion. Exports of cars, machinery and equipment, which make up over 80% of exports to the region, grew 20.1%. The depreciation of the yen since 1997 made transportation equipment, particularly cars, more price competitive again. The figures were also bolstered by the export of 10 new container vessels to Gulf Co-operation Council (GCC) members. Year-on-year, Japan's exports to the Middle East have risen by about 15% since 1995.
New oil money for the Middle East, in particular the GCC and Iran, can only make imports from Asia grow. This was made particularly apparent in Iran during September when Japan opened the largest pavilion at the 26th Tehran International Trade Fair. "We are the biggest foreign participant. Our big presence represents our willingness to promote relations with Iran," the director of the Japanese pavilion, Michiyoshi Takano, was reported to have said. Iran's President Mohammed Khatami was also due to visit Japan in late October.
Taking just the states of the GCC, Japan was the second largest exporter in 1998, beaten to first place by the United States. But other Asian countries are equally vital sources of imports for the Middle East. Trade flows into the GCC from East and Southeast Asian countries showed no sign of having been seriously affected by the financial crisis during 1998. Weak currencies allowed Asian suppliers to continue dominating in consumer goods, housewares and home furnishings.
That position continues. South Korea, for example, stands today as the 10th largest trading partner for Saudi Arabia, with bilateral trade totalling over US$9 billion in 1999. Exports to Saudi Arabia stood at US$1.17 billion in 1998, and South Korea ranked seventh largest exporter to the GCC as a whole. It was also the second largest buyer of crude from the region after Japan in 1998, with purchases worth US$13 billion.
The importance of South Korea as a partner was underlined by a visit from Prince Sultan Ibn Abdul Aziz, Second Deputy Prime Minister and Minister of Defence, in September. And it is not just trade. Saudi Aramco bought a 28.4% stake in South Korea's Ssangyong Oil in January of this year. Aramco is believed to have paid US$100 million for the stake, and took on US$660 million in liabilities. The deal adds to Aramco's existing 35% stake.
These kinds of cross-investments are a further factor governing the desire for economic security between the two regions. Prince Sultan Ibn Abdul Aziz' trip also took him to China, which has a US$1.5 billion deal with Saudi Arabia for a huge oil refinery in China and 10 million tonnes of Saudi oil annually for a 50-year period.
This is just one such deal. In March 1999, the Abu Dhabi-based Al-Manhal International Group established a US$1 billion gas joint venture with Shanghai Energy & Chemical Corporation, and Century American Corporation involving transporting liquefied petroleum gas (LPG) from the Gulf, as well as the construction of a gas terminal in China's Shanghai province.
South Korean and Japanese companies also have huge investments in Qatar's Ras Laffan Liquefied Natural Gas Co (RasGas), and substantial offtake agreements. Asian countries have invested billions of dollars in joint ventures in the Middle East to ensure supply and mitigate price fluctuations. High oil prices or not, Asia and the Middle East have a partnership that is vital to both their needs.
Exports From GCC Member States
(1998 Estimates)
Rank Exporting States Exports (US$ mil)
1 Saudi Arabia 50,504
2 UAE 26,452
3 Kuwait 14,091
4 Qatar 5,143
5 Oman 5,072
6 Bahrain 3,406
Total: 104,668
Source: IMF Direction of Trade Statistics; EER Inc,
estimates.
Imports Into GCC Member States
(1998 Estimates)
Rank Exporting State Exports (US$ mil)
1 Saudi Arabia 40,647
2 UAE 31,091
3 Kuwait 5,711
4 Bahrain 5,159
5 Oman 4,960
6 Qatar 3,908
GCC Total: 91,476
Source: IMF Direction of Trade Statistics; EER Inc estimates.